US economy

Higher Interest Rates Could Lighten Workers’ Wallets


WASHINGTON — President Trump renewed his attacks on the Federal Reserve on Monday in a tweet expressing incredulity that the Fed continues to raise interest rates. While his outbursts have drawn widespread criticism for being impolitic, a growing number of experts think the president has a point.

As the Fed drives up borrowing costs, there is increasing concern that the central bank is risking a return to recession, and may be preventing workers from claiming a larger share of the American pie.

As Lawrence H. Summers, formerly President Barack Obama’s chief economic adviser, put the matter in a recent interview with Fox Business Network, “The ways in which the president spoke, I don’t think any thoughtful economist would agree with.” Then he made clear that he mostly agreed: “I do think that there are more risks of overtightening than there are of undertightening right now.”

The Fed is expected to raise its benchmark interest rate on Wednesday for the fifth consecutive quarter. The unemployment rate sits at the lowest level in half a century, wages are rising and Fed officials say they are raising rates to make sure price inflation remains under control.

The Fed’s chairman, Jerome H. Powell, and other officials have emphasized that further rate increases would depend on the strength of the economy. In September, most Fed officials predicted it would raise rates at least three times in 2019. But the Fed’s plans are increasingly uncertain because the economic outlook is increasingly uncertain. The Fed will publish a new set of policy projections on Wednesday.

Mr. Trump’s trade war with China, along with concerns about global economic growth and a slowing Chinese economy, are fueling uncertainty and weighing on investors. The S&P 500 stock index fell more than 2 percent Monday, and is now down 4.8 percent for the year.

The president, who has repeatedly urged the Fed to stop raising rates, tweeted Monday that it was “incredible” for the Fed even to think about raising rates with “the outside world blowing up around us.”

Mr. Trump, who has hitched his political success to a booming stock market, started chastising the Fed as the market began to decline this summer, describing the central bank in various tweets and public comments as “crazy,” “loco,” “going wild” and “out of control.”

Some critics say the Fed is raising rates unnecessarily. While wages are rising more strongly, they argue that there is no evidence wage growth is causing price inflation.

Inflation is likely to fall short of the Fed’s preferred 2 percent annual pace for the seventh straight year.

Rising wages can lead to inflation, if companies find the money by increasing prices. But companies also can find money by curtailing profits, giving workers a larger share of the pie without increasing inflation.

Jon Faust, now a senior adviser to Mr. Powell, warned in a 2015 paper that the central bank would need to be careful as it raised interest rates to make sure it was fighting inflation rather than protecting the profit margins of corporations and the dividends of shareholders.

“A central bank intending to lean against inflationary winds could inadvertently end up resisting secular forces toward income equality,” wrote Mr. Faust, then an economist at Johns Hopkins University. The paper, written with Eric Leeper, was presented at the Fed’s annual Jackson Hole symposium.

There are various ways to measure the share of economic output claimed by workers, but all show the same basic pattern: A sharp decline during the first decade of the present century, followed by a period of stagnation, followed by a mild recovery that began around 2015. Over the last year, however, as the Fed has raised rates, the level of the “labor share” has stagnated.

Julia Coronado, the president of MacroPolicy Perspectives, said she expected the Fed to take a break after raising rates Wednesday to wait for clearer evidence of inflation. “I think that is their intention,” she said. “They want to pause on benign inflation and let things run strong.”

Mr. Leeper, the co-author of the 2015 paper, said in an interview that it was impossible to determine from the available data if the Fed’s rate increases were weighing on wage growth. But he added that he was confident that the Fed was mindful of the difference between rising prices and falling profits — not least because Mr. Faust now works at the Fed. “I think you can be sure that they’re carefully trying to decompose this in the way that we’re talking about,” Mr. Leeper said.

(Mr. Faust, as a Fed staff member, is subject to a “blackout period” before policy meetings.)

Mainstream economic models are built around the assumption that wages cannot rise faster than productivity growth without generating inflation. There is no allowance for changes in the division of economic output between workers and owners. The labor share is fixed.

Many economists continue to regard that as a reasonable approximation.

“Real income growth is dependent on productivity,” said David W. Berson, the chief economist at Nationwide Mutual Insurance Company.

The tax cuts orchestrated by the Trump administration significantly boosted corporate profits, and corporations shared some of that money with workers. But investors were the primary beneficiaries.

“The tax cuts mean there could be a little bit there for businesses to give without having to raise prices,” Mr. Berson said. “But I think if productivity growth remains weak, then wage gains will be translated into price gains fully and quickly.”

Mr. Leeper said his own observation of public comments by Fed officials suggested that they did not take for granted a direct connection between wage increases and price increases.

“I think Fed people are very much accustomed to thinking outside the models, much more so than academics,” he said.

There is some evidence to support his view in past public comments by top Fed officials.

Richard Clarida, the Fed’s vice chairman, wrote about the issue in his previous life as an economist at Pimco, an investment management firm. He published a research note in 2014 charting the increases in labor share during past economic recoveries. Mr. Clarida noted that the increases were not accompanied by increases in inflation.

Mr. Clarida revisited the issue in April 2016, noting that labor share had begun to rebound without an increase in inflation. He described this as a normal pattern that should not raise concerns about inflation or corporate profits.

“Especially in a low-productivity-growth world, gains in labor’s share will come, at least to some extent, out of profit growth,” Mr. Clarida said.

Mr. Powell described the decline of labor share as “very troubling” during an appearance before the Senate Banking Committee in July.

He said most reasons for the decline were not under the Fed’s control. But he added that the Fed had some power to help.

“The thing that we can do is to take seriously your congressional order that we seek maximum employment so in tight labor markets workers are more likely going to be paid well and paid their share,” he said.





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